Growth and Competitiveness in Kazakhstan: Issues and Priorities in the Areas of Macroeconomic, Industrial, Trade and Institutional Development Policies

Kazakhstan has achieved many of its goals and faces enormous opportunities. It has been able to transform itself into a market economy, thus unleashing the productive capacity of its citizens and creating the conditions for the country to benefit from international trade and investment. In addition, it has discovered large quantities of oil reserves that will allow it to sustain a tripling of oil production in the next two decades.

Under these conditions, the recent performance of the economy has been characterized by rapid growth with declining unemployment. The economy has been propped up by increased fiscal spending and by private investment. Macroeconomic management has been prudent in the sense that inflation has been kept low, the government has accumulated significant fiscal savings in the National Fund and the Central Bank has built up a significant stock of international reserves. The question is how to make this situation last over the medium and long term and how to make the economy resilient to the shocks that may come.

This report is a collection of policy memos that deal with the choices the government faces going forward in the broad area of macroeconomic policies, including fiscal policy and institutions, monetary and exchange rate arrangements and policies, financial policies, industrial policy, trade policy, and broad issues in institutional development.

Building a Better Future for the Dominican Republic

From 2010-2011, a team from the Growth Lab at Harvard’s Center for International Development collaborated with the Dominican government to develop a strategy to create a highly productive, internationally competitive economy. With a vision for 2030, this team of scholars, practitioners, and government agencies hopes to revitalize the Dominican economy, promoting inclusive growth and sustainable human development.

The faculty team advised on a growth strategy based on diversification and development of the tradable sector. The five-tiered approach focuses on education, exports, fiscal reform, financial architecture, and development along the Haitian border, culminating in overall economic growth, job creation, demographic transitions, and restructured formal sectors.

Also included in the overall plan are investment promotion, infrastructure development, active scouting of new and innovative goods and services, maximization of the country’s tourist potential, improved governance, and a revised tax regime. Specific financial recommendations include encouraging and reorganizing pension fund investment and changing the average savings rate as a benchmark for higher returns on those funds.

Country diversification, product ubiquity, and economic divergence

Countries differ markedly in the diversification of their exports. Products differ in the number of countries that export them, which we define as their ubiquity. We document a new stylized fact in the global pattern of exports: there is a systematic relationship between the diversification of a country’s exports and the ubiquity of its products. We argue that this fact is not implied by current theories of international trade and show that it is not a trivial consequence of the heterogeneity in the level of diversification of countries or of the heterogeneity in the ubiquity of products. We account for this stylized fact by constructing a simple model that assumes that each product requires a potentially large number of non-tradable inputs, which we call capabilities, and that a country can only make the products for which it has all the requisite capabilities. Products differ in the number and specific nature of the capabilities they require, as countries differ in the number/nature of capabilities they have. Products that require more capabilities will be accessible to fewer countries (i.e., will be less ubiquitous), while countries that have more capabilities will have what is required to make more products (i.e., will be more diversified). Our model implies that the return to the accumulation of new capabilities increases exponentially with the number of capabilities already available in a country. Moreover, we find that the convexity of the increase in diversification associated with the accumulation of a new capability increases when either the total number of capabilities that exist in the world increases or the average complexity of products, defined as the number of capabilities products require, increases. This convexity defines what we term as aquiescence trap, or a trap of economic stasis: countries with few capabilities will have negligible or no return to the accumulation of more capabilities, while at the same time countries with many capabilities will experience large returns – in terms of increased diversification – to the accumulation of additional capabilities. We calibrate the model to three different sets of empirical data and show that the derived functional forms reproduce the empirically observed distributions of product ubiquity, the relationship between the diversification of countries and the average ubiquity of the products they export, and the distribution of the probability that two products are co-exported. This calibration suggests that the global economy is composed of a relatively large number of capabilities – between 23 and 80, depending on the level of disaggregation of the data – and that products require on average a relatively large fraction of these capabilities in order to be produced. The conclusion of this calibration is that the world exists in a regime where the quiescence trap is strong.

South Africa’s Export Predicament

Marriage, Education, and Assortative Mating in Latin America

In this paper we establish six stylized facts related to marriage and work in Latin America and present a simple model to account for them. First, skilled women are less likely to be married than unskilled women. Second, skilled women are less likely to be married than skilled men. Third, married skilled men are more likely to work than unmarried skilled men, but married skilled women are less likely to work than unmarried skilled women. Fourth, Latin American women are much more likely to marry a less skilled husband compared to women in other regions of the world. Five, when a skilled Latin American woman marries down, she is more likely to work than if she marries a more or equally educated man. Six, when a woman marries down, she tends to marry the “better” men in that these are men that earn higher wages than those explained by the other observable characteristics. We present a simple game theoretic model that explains these facts with a single assumption: Latin American men, but not women, assign a greater value to having a stay-home wife.

This research is part of the “Closing the Global Gender Gap: A Call to Action,” an initiative sponsored by the Women and Public Policy Program in collaboration with the Center for International Development at Harvard University, with support from ExxonMobil’s Educating Women and Girls Initiative and the Women’s Leadership Board of the Harvard Kennedy School.

Structural Transformation in Ecuador

This paper applies new techniques and metrics to analyze Ecuador’s past record of and future opportunities for structural transformation. Ecuador’s export dynamics and the emergence of new export activities have been the historical drivers of the country’s growth, but recently Ecuador’s export basket has undergone little structural transformation. The same broad sectors continue to dominate, and the overall sophistication of the export basket has actually declined in recent years. In order to consider why movement to new, more sophisticated export activities has lagged in Ecuador, we examine export connectedness and find that the country is concentrated in a peripheral part of the product space. We quantitatively scan Ecuador’s efficient frontier and identify new, high-potential export activities that are nearby in the product space. This sector evaluation provides valuable information for the government to prioritize dialogue and interventions, but it is not meant to be a conclusive identification of “winners”. Rather, we provide policy guidelines to facilitate the emergence of these and other new export activities, dealing with the sector-specificity of much of what the government must provide to the private sector to succeed while at the same time avoiding the well-known perils of traditional industrial policies.

Redemption or Abstinence? Original Sin, Currency Mismatches, and Counter-Cyclical Policies in the New Millenium

This paper updates our previous work on the level and evolution of original sin. It shows that while the number of countries that issue local-currency debt in international markets has increased in the past decade, this improvement has been quite modest. Although we find that countries have been borrowing at home, thanks to deepening domestic markets, we document that foreign participation in these markets is more limited than what is usually assumed. The paper shows that the recent decline of currency mismatches and the consequent ability to conduct countercyclical macroeconomic policies is due to lower net debt (abstinence) and not to redemption from original sin. We conclude that original sin continues to make financial globalization unattractive and developing countries have opted for abstinence because foreign currency debt is too risky. The promised paradise of financial globalization will need to wait for redemption from original sin. 

Policies for Achieving Structural Transformation in the Caribbean

Countries seldom grow rich by producing the same things more productively. They usually change what they produce in the process of development. Structural transformation is the process whereby countries move to new economic activities that are more productive and thus are able to pay higher wages. This process is very important for growth: countries that are able to upgrade their exports by developing new economic activities tend to grow faster (Hausmann and Rodrik, 2003; Hausmann, Hwang, and Rodrik, 2006).

The purpose of this paper is to apply new methodologies to analyze the history of and future opportunities for structural transformation in the Caribbean. We first look at the composition of exports from the Caribbean, and show that the region is specialized in relatively unsophisticated, ―poor-country‖ export products, and this is not simply a consequence of their small size or specialization in tourism and financial services.

We then review the concept of the ―product space‖ and determine where the Caribbean countries are specialized within this space. The results show that generally these countries export peripheral products that are intensive in capabilities with few alternative uses. In addition, we consider what effects regional integration would have on this opportunity set and show that future opportunities for structural transformation are much higher for the Caribbean Community (CARICOM) as a perfectly integrated zone—higher than for any of its members on their own.

The final section discusses the policy implications of these results. We show that for almost all countries in the Caribbean there is a need to move to new export activities. Some countries in the region have a set of nearby activities they could exploit, including in the services sector, which suggests a parsimonious approach to promoting new activities is appropriate. This approach involves the government better orienting itself to learn what emerging sectors need in the way of publically provided inputs. But for many countries in the region, there are few nearby activities, suggesting a more proactive search process is necessary. In the appendix we apply the product space data to this search for nearby and more distant export activities for Belize and Jamaica. However, such data is merely a starting point for what must be a continuous process of high-bandwidth dialogue with the private sector to learn what is needed for new activities to emerge. We provide general design guidelines for such a dialogue, both for nearby and more distant activities, and we outline some specific initiatives as examples.

The Building Blocks of Economic Complexity

For Adam Smith, wealth was related to the division of labor. As people and firms specialize in different activities, economic efficiency increases, suggesting that development is associated with an increase in the number of individual activities and with the complexity that emerges from the interactions between them. Here we develop a view of economic growth and development that gives a central role to the complexity of a country’s economy by interpreting trade data as a bipartite network in which countries are connected to the products they export, and show that it is possible to quantify the complexity of a country’s economy by characterizing the structure of this network. Furthermore, we show that the measures of complexity we derive are correlated with a country’s level of income, and that deviations from this relationship are predictive of future growth. This suggests that countries tend to converge to the level of income dictated by the complexity of their productive structures, indicating that development efforts should focus on generating the conditions that would allow complexity to emerge in order to generate sustained growth and prosperity.

Last updated on 12/10/2021

Growth Diagnostics

Most well-trained economists would agree that the standard policy reforms included in the Washington Consensus have the potential to be growth-promoting. What the experience of the last 15 years has shown, however, is that the impact of these reforms is heavily dependent on circumstances. Policies that work wonders in some places may have weak, unintended, or negative effects in others.1 We argue in this chapter that this calls for an approach to reform that is much more contingent on the economic environment, but one that also avoids an ‘anything goes’ attitude of nihilism. We show it is possible to develop a unified framework for analyzing and formulating growth strategies that is both operational and based on solid economic reasoning. The key step is to develop a better understanding of how the binding constraints on economic activity differ from setting to setting. This understanding can then be used to derive policy priorities accordingly, in a way that uses efficiently the scarce political capital of reformers.